Third quarter highlights Sales were SEK 57.1 (53.8) b. Sales adjusted for comparable units and currency increased by 3% driven by strong growth in North America and North East Asia. Reported sales grew by 6%.
Operating income was impacted by cost provisions of USD -1.2 b. (SEK -11.5 b.) related to a resolution of the investigations by SEC and DOJ in the US and a refund of social security costs of SEK 0.9 b., referred to as items affecting comparability in the report.
Operating income was SEK 6.5 b. (11.4% operating margin) when excluding restructuring charges and items affecting comparability. Reported operating income was SEK -4.2 (3.2) b.
Gross margin excluding restructuring charges was 37.8% (36.9%) with improvements in Managed Services, Digital Services and Networks. Reported gross margin was 37.7% (36.5%).
Net income was SEK -6.9 (2.7) b., negatively impacted by items affecting comparability.
Free cash flow excluding M&A was SEK 5.5 (0.7) b. Net cash increased to SEK 37.4 (32.0) b.
Investor Update key messages
Focused business strategy remains and the Company is tracking towards the new financial targets:
Sales ambition of SEK 230-240 b. for 2020 (previously SEK 210-220 b.), based on a SEK/USD rate of 9.50.
Operating margin target for 2020, excluding restructuring charges, remains unchanged at >10% of sales. This incorporates continued dilutive impact from strategic contracts, an initially higher cost level for newly introduced 5G products and a target adjustment for segment Emerging Business and Other to SEK -1.5 to -2.0 b. (previously break-even).
Operating margin target of 12-14% for 2022 (previously >12%), excluding restructuring charges, based on an ambition to grow faster than the market in combination with leverage from investments in market position and R&D.
SEK b. Q3
2019 Q3
2018 YoY
change Q2
2019 QoQ
change Jan-Sep
2019 Jan-Sep
2018
Net sales 57.1 53.8 6% 54.8 4% 160.8 147.0
Sales growth adj. for comparable units and currency - - 3% - - - -
Gross margin 37.7% 36.5% - 36.6% - 37.5% 35.2%
Gross margin excluding restructuring charges 37.8% 36.9% - 36.7% - 37.6% 36.5%
Operating income (loss) -4.2 3.2 - 3.7 - 4.4 3.1
Operating margin -7.3% 6.0% - 6.8% - 2.8% 2.1%
Operating income excl. restr. charges & items affecting comparability [1] 6.5 3.8 71% 3.9 68% 14.0 6.7
Operating margin excl. restr. charges & items affecting comparability [1] 11.4% 7.0% - 7.0% - 8.7% 4.6%
Net income (loss) -6.9 2.7 - 1.8 - -2.6 0.2
EPS diluted, SEK -1.89 0.83 - 0.51 - -0.67 0.01
Free cash flow excluding M&A 5.5 0.7 - 2.2 147% 11.8 1.3
Net cash, end of period 37.4 32.0 17% 33.8 11% 37.4 32.0
[1] Operating income excluding restructuring charges in all periods. Excluding cost provisions related to resolution of the SEC and DOJ investigations of SEK -11.5 b. and refund of social security costs of SEK 0.9 b. in Q3 2019. Excluding a capital gain related to the divestment of MediaKind of SEK 0.7 b. and a reversal of a provision for impairment of trade receivables of SEK 0.7 b. in Q1 2019.
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
Comments from B rje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
We continue to see strong momentum in our business, based on the strategy to increase our investments for technology leadership, including 5G. We saw organic sales growth[1] of 3% in the quarter, driven by the early adopters of 5G, in North America and North East Asia. Our operating income was SEK 6.5 b., corresponding to a margin of 11.4% excluding restructuring costs, the SEC and DOJ provision of USD -1.2 b. (SEK -11.5 b.) and the refund of social security costs of SEK 0.9 b. Free cash flow before M&A was SEK 5.5 (0.7) b. adding to our strong financial position.
Our focused strategy, introduced in 2017, is aimed at building a stronger Ericsson longer term. With clear focus on our operator customers the strategy stands on a foundation of increased investments in R&D for technology and cost leadership, and growing market footprint. Increased R&D efforts, which will continue, have resulted in a competitive portfolio driving improved gross margin. In addition, we have been able to record several important wins improving market footprint for future business. We are disciplined in the deals we take and target opportunities where we have a clear competitive advantage through technology leadership, supported by our improved cost structure in hardware and software. While we believe the strategic contracts are attractive long term, the initial margins may be challenging. This is due to high associated costs as operators change vendors.
An important indicator for our execution of the strategy is the improvement in gross margin. The gross margin[2] in the quarter ended at 37.8% compared with 36.9% last year and 36.7% last quarter. Within the 0.8 percentage point[3] sequential decline in Networks gross margin, we have absorbed the margin impact and inventory provisions related to strategic contracts.
The largest market for 5G infrastructure will be China where deployments are expected to start near term. We have invested to increase our market share, however it is still too early to assess possible volumes and price levels. Based on historic experience we expect to have challenging margins initially but positive margins over the lifespan of a contract.
With an organic sales growth[1] of 4%, segment Networks delivered another solid quarter, with strong development in North America. Operating margin improved YoY, with continued good traction for the Ericsson Radio System.
The turnaround of Digital Services is on track for low single digit margins in 2020. Dr
